Did Growth Management Cause The Housing Bubble?
A new white paper was released yesterday by the Cato Institute which boldly claims that the cause of the housing bubble isn't what everybody else has been talking about for the past few years. In this policy analysis, Randy O'Toole argues that the blame rests on a regulatory system known as growth management, saying
Some people blame the Federal Reserve for keeping interest rates low; some blame the Community Reinvestment Act for encouraging lenders to offer loans to marginal homebuyers; others blame Wall Street for failing to properly assess the risks of subprime mortgages. But all of these explanations apply equally nationwide, while a close look reveals that only some communities suffered from housing bubbles.
Needless to say, I found the topic intriguing and thought I would provide a "readers digest" version of my interpretation of the paper today. This is most likely not a critical read for somebody looking to buy or sell a home, but if you are a concerned citizen and wonder why housing costs are so high, this is a well written paper worthy of your attention. You can download Randy O'Toole's Growth Management Policy Analysis paper in it's entirety right here.
Usual Suspects Only Fueled The Fire
It has always been my opinion (at the street level) that the housing bubble was caused by a new, vigorous apetite for housing that began in 2000 because of many colliding factors:
- GSEs (Fannie and Freddie) were created to make home ownership possible for all
- The crash of the tech stocks caused many to pull money from mutual funds
- Excess money out of the market created boom in 2nd home market
- Baby boomers invested in 2nd homes
- As the housing market started to cool in 2004, new loan programs were created to keep a hot market growing
- The subprime market boomed, pumping in even more money for lenders to use to create loans
I have always felt the real culprit in all of this was consumer greed, and I am not so sure that this is not still my belief. One year ago, I wrote a blog about the comments made by then Treasury Under Secretary for International Affairs David McCormick during an interview on CNBC where he discussed what the government planned to do to restore stability in the global markets. In a nutshell, this is how he explained the market meltdown:
Regulators and investors alike showed a growing complacency toward risk. These factors blended into a dangerous cocktail of underlying conditions ripe for instability.
This imbalance between risk and reward was most evident in the U.S. housing market, where lenders significantly loosened credit standards, particularly for a new generation of adjustable-rate mortgages. Yet aggressive financial innovation went well beyond mortgages. Banks and brokers created an alphabet soup of products with simple names like CDOs, CLOs, and SIVs, which were in fact complex and opaque investment products and structures. Credit-rating agencies responsible for assessing and rating these assets, as well as investors who purchased them, failed to question the chances of these underlying investments going bad.
Even one year later, I think this opinion stated by McCormick is spot on. Easy money made buyers out of all of us (which does not excuse any of us from being part of the causation). However, rather than view easy money and risk complacency as the reason (for the bubble), I have to say the Mr. O'Toole's paper has me understanding how Growth Management initiatives most likely would have lead us to the same condition at some point in time.
Growth Management Creates Artificial Shortages In Supply
In reading Mr. O'Toole's work, he spends a good bit of time discussing the supply and demand dynamics of the housing market, explaining that the price of new construction drives the price of resales. When supply is limited, prices go up and existing homeowners follow suit when selling their homes.
Because growth controls did not allow heightened demand for housing to dissipate through new supply, the result was an immense price bubble in states housing nearly half of the nation’s population.
This is at the heart of his point, and it is one that I had never considered. Had supply raced at the speed of demand, home values would not have doubled in Tallahassee from 2000 to 2006. This was a large leap that we will be seeing corrected in our market for many years to come. And anybody who has ever gone through the permitting process in Tallahassee will tell you, it is very expensive and takes way too long.
The real estate graph below shows supply and demand relationships in the Tallahassee MLS and offers anecdotal evidence for O'Toole's claim that supply failed to keep up with demand. During the period of 2003 through 2005, the relative supply of homes (purple line in graph) remained heavily weighted towards a seller's market, which could have (and should have) been arrested with new home construction. This period of time also correlates to the fastest appreciation that Tallahassee housing market has experienced.
Home Values Stated As A Multiple Of Income
In his report, O'Toole shows that the bubble created a large distortion in the historical relationship between income and home value. He writes:
Prior to 1970, median home prices in the vast majority of the United States were 1.5 to 2.5 times median family incomes. The main exception was Hawaii, which, not coincidentally, had passed the nation’s first growth-management law in 1961. Home-value to income ratios remain in that range today in most places that do not have growth-management planning. In other words, in the absence of government regulation, median housing prices average about two times median family incomes.
The paper includes a list of all of the States and current home value to income relationships. Not surprisingly, the States with the biggest housing bubbles are Growth Management States.
|State||Price Gain||Price Decline||Bubble?||Regulation|
|Dist. Of Columbia||145.80%||-9.30%||Yes||HI|
(Regulatory status is: FL=state dominated by federal land; GM=mandatory state growth-management law; HI=urban areas hemmed in by other states with growth management; NE=New England (weak county governments); NG=no growth management; UA=selected urban areas practice growth management (including Denver and Boulder, CO; Boise, ID; Chicago, IL; Minneapolis–St. Paul, MN; Missoula and Whitefish, MT; Albuquerque and Santa Fe, NM; Philadelphia, PA; Charleston, SC; Salt Lake City, UT; northern Virginia; and Madison and Milwaukee, WI).
Less Regulation From Government In Housing
Ultimately, O'Toole is calling for less regulation and the dismantling of Growth Management laws in the States that have them. He even warns that proponents of Growth Management are circling their wagons for stiffer controls, which he feels will lead us to an even bigger housing bubble.
I am not so sure how we would even begin to dismantle the growth management policies in the State of Florida. I am not even convinced that this is the solution. But after reading O'Toole's paper, I would suggest that our State Government could learn alot about smart growth policies from States such as Texas and Georgia, who have healthy growth and seemed to have completely avoided the bubble.
Whether or not you believe that Growth Management caused the housing bubble, after reading O'Toole's paper I suspect you will agree that it definitely played a role in the whole problem. In these tough economic times, it seems very wise to consider dismantling a costly, beaurocratic process (cut government expenses) that causes higher costs and delays to growth (increased tax income) in the State of Florida and everywhere else that Growth Management practices are in play.
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Joe Manausa is a real estate blogger, a real estate investor and the Broker and Co-Owner of Joe Manausa Real Estate. He can be reached via e-mail through the Tallahassee Real Estate Website or catch his latest writings on the Tallahassee Florida Real Estate Blog , or by calling (850) 386-2001.
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Love your blog and appreciate all the work and information you provide. I do however feel the need to point out a few things with this blog and the referenced paper.
First in the interest of full disclosure I should point out that I have a Masters Degree in Urban and Regional Planning and have worked at various agencies and positions in state growth management for a few years. I also believe very much in the free market and have an entire side of the family involved in the real estate and residential construction industry. I would also point out the author referenced in your blog is the author of "The Best-Laid Plans: How Government
Planning Harms Your Quality of Life, Your Pocketbook, and Your Future". One of the first things you learn in statistics is that you can always find one that supports your position at any time.
I want to point out that Growth Management existed before the recent boom and bust, during the recent boom and bust and will likely remain in some form after the boom and bust. When the real estate boom was occuring nobody complained about growth management but now that it's over and certain industries are struggling it makes an easy target.
In reality if you measure across the state, local government comprehensive plans(every City and County in the state has one) currently allow enough dwelling units to accomodate another 50 million people in the state. This is what is currently allowed in comprehensive plans, the developer does not have to apply for any change, it's allowed on paper today.
There are also approximately 300,000 vacant homes across the state ( a 3 year supply). As you have pointed out in many of your blogs part of the current problem is the current surplus of housing units. How would building enough new houses to accomodate the hightened demand help this situation, if not make it worse? There would be even more vacant houses unsold, lowering prices. If Growth Management were the sole cuase of the boom and bust there might be an argument. But as you have pointed out there are many other issues that contributed to the boom and bust.
Other issues (slow economy, lowered interest rates as a response, easy money) started the buying frenzy in which many buyers were investors, second homebuyers, flippers etc. This artificial demand raised prices but there were not an influx of new people needing housing. Now without those people (who didn't exist) the houses sit empty.
Florida is a growth state as is California and other states identifed as ones with Growth Management and the larger booms and busts. The fact that the states with GM also had the larger booms and busts may be a spurious relationship. In fact most of those states are historical growth states that adopted GM in an effort to manage growth more effectivly. Of course the high growth states will exibit larger booms and busts than Arkansas, Mississippi or Montana who haven't seen high rates of historical growth.
Florida is a growth state we depend on it and always have that's one of the reasons the state is hurting so much right now. City and County commissions rarely meet a development they don't like, the great majority get approved. Growth Management in Florida is not meant to stop or control development, rather manage it. In other words try to make sure the Everglades will exist in the future, that we have water to drink, and that there will be enough schools and roadways to meet the demand of new development. Certain growth management/control strategies such as tight urban growth boundaries can raise prices but not near as much as low interest rates and a flash flood of new real estate buyers. That happens way faster than development which often takes years to come online.
Thanks TS and great feedback. I agree with so much of what you wrote and in fact, I would say that your thoughts exactly mirrored mine prior to my reading his entire paper. Here are a few points I could not refute:
1. Look at the graph the I included in the blog: Note how supply failed to meet demand in the graph from 2003 through 2005 (three years). Prior to 2003 going back to I believe 2001 was similar. So, does this mean that our builders in Tallahassee are stupid/ignorant? I don't think so. I think getting land through the development process takes too long. I have some personal experience with this issue as well. It takes too long.
2. If during the boom our supply had been higher, don't you think prices would have gone up a the same rate that they did for the previous 15+ years? At a rate of about 3.5% per year?
3. Houston, Texas is sited throughout his paper as the "correct" way of growing. They do not apparently have a similar process as we have here in Florida. Are they going to be suffering through a poorly planned, highly congested city at some point, or is there something that we could learn from them?
4. I agree with you on statistics, we can interpret things in generously different ways at times. But do you see this in his results of areas with Growth Management versus areas with less stringent Growth Management?
Thanks again TS for a very informative reply.
Sorry for the delayed response.
1. You are right it takes a long time to get development through the approval process, and our area has that reputation. Just a hypothesis, I don't know if it's true or not. My Uncle is a contractor over in the Emerald Coast area and I worked for a contractor/developer for two years while in school. As you probably know most area contractors are small to medium sized businesses. They can only build soo many houses at a time. True any busisness can expand to meet increased demand but only if they have the resources and lobor to do so, and can do it while maintaining quality control. What many contractors do when besiness is booming isn't expand their company greatly rather they operate at peak production and build a client list and contracts for the future. I didn't hear anybody complianing during the boom that we have demand to build more houses we just can't get them approved. Most builder were plugging along building as much as they could (key phrase as much as they could).
2. Yes if supply had risen proportinately to demand then you would expect prices to have followed their traditional patterns. However, that is if you isolate supply as the only variable affecting price. The underlying theme to the article was that growth management limited supply thus causing the prices to rise. I don't believe that underlying theme. While that may have played a small part, I believe all the other things we've mentioned, easy money, low interest rates, out of normal demand from investors/flippers etc, had a much larger impact on the market and pricing than growth management.
3. Yes Texas has more relaxed zoning regulations than Florida. In fact on some streets in Houston you may find a Church, Gas Station, Houses, and a School in the same area. Euclidian Zoning where you isolate land use types such as exculsive residential neighborhoods really became popular after WWII. Many in planning are starting to realize the shortfalls of this stricter type of zoning. There is a movement even in Florida to return to more traditional zoning and the allowance of mixed use areas. As for the Future I don't know. I can however offer two cities that demonstrate the good and bad from both excessive planning and a lack of planning. Portland Oregon is held by planners as a poster child of good planning. By all accounts it is a very nice place to live but it's also very expensive. On the other hand Atlanta is relatively cheap to live in but has horrible traffic and a growing problem of water shortage.
4. Again, I just see other things at play and perhaps a spurious relationship in his study. There are many other variables that determine how states develop and the pricing of real estate in those states. Florida has always relied on three main economic engines, tourism, agricluture, and development. One of the attractions people always listed when moving to Florida was cheap housing. This was after we instituted Growth Management and before this last real estate boom and bust.
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